Stagnant inflation is not only holding down the cost of living but impacting on how stock markets are performing as well, claims an investment expert.
James Sym, European equities fund manager at investment firm Schroders has examined how growth and value stocks are working in Europe and feels they are underperforming – but explains that if inflation picks up, this could reverse.
Growth stocks have current and projected high growth rates, while value stocks are under-priced and have the potential to increase in value.
Sym argues that central bank quantitative easing is distorting financial markets and that signs that inflation is starting to flicker back to life across Europe could see this distortion reverse.
That, he says, will see growth stocks slow down, while value stocks that have stood still could take off.
Stocks are cheap
His theory is that central bank monetary policy has helped growth stock at the expense of value stocks.
“Typical growth stocks such as healthcare and consumer staples is a crowded because few fund managers have any overweight allocation of value stocks,” said Sym.
“The markets are at extreme levels when looking at the opposite positions of growth and value.
“I believe stocks are almost as cheap as they have ever been and reverse to the mean would give a double-digit upside.
“Inflation could be the catalyst. European inflation is low, but the signs indicate a pick up may be on the way.”
Influences on inflation
The three factors Sym pinpoints as influences on inflation rates are:
- A realisation oil prices will not stay low forever and that even stable oil prices at the current level would increase inflation by 1% this year
- European unemployment is seeing high wage rises in some sectors, such as engineering
- Underinvestment means factories are working at capacity and any rise in demand could trigger price increases
“We looked at the US and can see inflation is back to normal and we can’t see why Europe won’t follow,” he said.
“Banks look undervalued by around 50% and a good candidate for growth if inflation turns up. Insurers also look like they could offer good value at well.
“Value stocks look cheap, while growth stocks look expensive. If inflation returns to more normal levels, this will boost value stocks and I can see a great opportunity in European equities at the moment.”
